How to Claim Deductions for State and Local Taxes

Deduct state and local taxes when you itemize deductions for federal income taxes. These deductions will lower your taxable income and reduce your taxes.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Financial Statements
• Financial Calculator
• Paper And Pencils
• Computers
• Tax Preparation Software

1. Determine if you will be itemizing deductions. Only itemize if the deductions are greater than your standard deduction for your filing status.

2. Calculate any state income taxes you paid in the tax year. Include W-2 withholding, estimated payments, and any balance due from a previous year. Write the total amount on line 5 of Schedule A.

3. Find out if you paid any mandatory contributions to state disability or benefit funds in the tax year. Only a few states, such as New York and California, have such funds. Write the total amount on line 5 of Schedule A.

4. Find out if you paid any local income taxes in the tax year. Most areas don't have local income taxes. Write the amount on line 5 of Schedule A.

5. Calculate any real estate taxes you paid on non-business property in the tax year. Write the amount on line 6 of Schedule A.

6. Find out if you paid any personal property taxes in the tax year. In some states, a portion of the automobile license fee is a personal property tax. Write the amount on line 7 of Schedule A.

7. Find out if you paid any tax to a foreign country or U.S. possession during the tax year. It is almost always better to take a foreign-tax credit, and you usually can do so. If you want to take a deduction instead of a credit, write the amount on line 8 of Schedule A.

8. Add up lines 5, 6, 7 and 8 of Schedule A. Write the grand total on line 9 of Schedule A.

Tips & Warnings

• Self-employment taxes for Social Security and Medicare are the only deductible federal taxes, but you do not use Schedule A for this deduction. Write half of your self-employment tax on line 27 of the 1040. Do this even if you do not itemize deductions.
• Prepaid taxes - such as real estate taxes or estimated state income taxes paid in December even though they are not due until after January 1st - are deductible in the tax year you paid them.
• When you buy or sell property, the buyer and seller usually make adjustments in the closing costs for real estate taxes. Make sure the closing agent or attorney can tell you exactly what taxes you were responsible for and can deduct. A good tax preparer is very useful for a tax year in which you have a real-estate transaction.
• Many taxes are not deductible. Federal income taxes, gift taxes, estate and inheritance taxes, employee social security taxes, fines and most fees cannot be deducted to lower your taxable income.
• Penalties and interest on taxes are not deductible.
• Real estate taxes on business property must be deducted on the schedule or form you use for the business.
• Refunds of state, local or real estate taxes have to be counted as income if they were part of your itemized deductions for the year they were paid. Overpaying your taxes to get a larger deduction can come back to haunt you.